1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1997.
or
Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
Commission File No 0-21075
First Enterprise Financial Group, Inc.
--------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-3688499
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Davis Street, Suite 1005, Evanston, Illinois 60201
- ------------------------------------------------ --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 866-8665
______________________________________________________________________________
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X___ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $.01 par value, 5,444,474 shares outstanding as of July 31, 1997.
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FIRST ENTERPRISE FINANCIAL GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Balance Sheets........................................................................ 3
Statements of Income.................................................................. 4
Statements of Cash Flows.............................................................. 5
Notes to Financial Statements......................................................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................... 10
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS..................................................................... 19
Item 2. CHANGES IN SECURITIES................................................................. 19
Item 3. DEFAULTS UPON SENIOR SECURITIES....................................................... 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS...................................................................... 19
Item 5. OTHER INFORMATION.................................................................... 19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................... 19
SIGNATURES............................................................................ 20
INDEX OF EXHIBITS..................................................................... 21
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
---------- -------------
ASSETS
Cash........................................................................ $ 2,604,492 $ 1,323,149
Restricted cash............................................................. 6,234,635 4,586,780
Automobile finance receivables.............................................. 85,704,284 118,537,808
Allowance for credit losses................................................. (8,705,292) (11,349,783)
------------ ------------
Finance Receivables, net.................................................. 76,998,992 107,188,025
Property and equipment - at cost............................................ 1,429,078 1,255,777
Repossessed assets.......................................................... 1,303,775 929,560
Deferred tax asset.......................................................... 1,926,000 2,241,000
Retained interest........................................................... 7,684,524
Other assets................................................................ 4,724,775 2,231,660
------------ ------------
TOTAL ASSETS............................................................ $102,906,271 $119,755,951
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Senior debt................................................................. $ 44,651,000 $ 61,153,000
Notes payable - securitized pool............................................ 27,781,540 36,732,987
Servicing liability......................................................... 3,773,121 --
Accounts payable - dealers.................................................. 4,237,843 2,704,455
Other accounts payable and accrued expenses................................. 1,913,070 2,524,003
Other liabilities........................................................... 1,005,058 325,208
------------ ------------
Total liabilities....................................................... 83,361,632 103,439,653
Stockholders' equity:
Common stock, $.01 par value; 20,000,000
shares authorized; 5,444,474 and 5,285,955 shares issued
and outstanding at June 30, 1997 and December 31, 1996, respectively 54,445 52,860
Additional paid-in capital................................................ 14,099,523 13,921,286
Unrealized gain - retained interest....................................... 561,637 --
Retained earnings ........................................................ 4,829,034 2,342,152
------------ ------------
Total stockholders' equity.............................................. 19,544,639 16,316,298
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.................................................... $102,906,271 $119,755,951
============ ============
The accompanying notes are an integral part of these statements.
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FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended June 30, Six months ended June 30,
--------------------------- -----------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
Finance charges and interest.................................. $4,722,964 $3,759,751 $10,660,173 $7,015,704
Interest expense.............................................. 1,785,253 1,532,641 3,804,359 2,890,221
----------- ---------- ------------ -----------
Net interest income....................................... 2,937,711 2,227,110 6,855,814 4,125,483
Provision for credit losses................................... 1,539,659 225,000 3,420,000 625,000
----------- ---------- ------------ -----------
Net interest income after provision for credit losses..... 1,398,052 2,002,110 3,435,814 3,500,483
Other income:
Servicing income............................................ 1,440,619 1,441,759 2,406,260 2,567,488
Insurance commissions....................................... 566,806 756,860 1,029,157 1,407,767
Gain on sale of finance receivables......................... 1,960,000 115,343 4,985,000 524,343
Fees and other income....................................... 535,018 318,335 996,021 676,285
----------- ---------- ------------ -----------
Total other income........................................ 4,502,443 2,632,297 9,416,438 5,175,883
----------- ---------- ------------ -----------
Income before operating expenses.......................... 5,900,495 4,634,407 12,852,252 8,676,366
Operating expenses:
Salaries and employee benefits.............................. 2,814,851 1,972,972 5,454,838 3,938,012
Rent expense................................................ 203,879 116,363 392,120 229,536
Depreciation and amortization............................... 114,798 84,976 231,132 168,556
Professional services....................................... 155,032 179,549 366,333 254,467
Other expenses.............................................. 1,147,980 806,948 2,362,947 1,522,874
----------- ---------- ------------ -----------
Total operating expenses.................................. 4,436,540 3,160,808 8,807,370 6,113,445
----------- ---------- ------------ -----------
Income before income taxes................................ 1,463,955 1,473,599 4,044,882 2,562,921
Income taxes.................................................. 565,000 591,000 1,558,000 1,018,000
Deferred income tax effect of S corporation termination....... -- -- -- (267,000)
----------- ---------- ------------ -----------
Net income................................................ $ 898,955 $ 882,599 $ 2,486,882 $1,811,921
=========== ========== ============ ===========
Net income per share.......................................... $0.16 -- $0.44 --
=========== ========== ============ ===========
Pro forma net income per share................................ -- $0.19 -- $0.39
=========== ========== ============ ===========
Weighted average number of common and common
equivalent shares outstanding............................... 5,666,028 -- 5,648,135 --
=========== ========== ============ ===========
Pro forma weighted average number of common
and common equivalent shares outstanding.................... -- 5,674,675 -- 5,674,675
=========== ========== ============ ===========
The accompanying notes are an integral part of these statements.
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FIRST ENTERPRISE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
------------------------------
1997 1996
----------- -------------
Cash flows from operating activities:
Net income.......................................................... $ 2,486,882 $ 1,811,921
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization..................................... 231,132 225,279
Provision for credit losses....................................... 3,420,000 625,000
Deferred income taxes............................................. 315,000 (501,000)
Deferred income tax effect of S corporation termination........... -- (267,000)
Changes in assets and liabilities:
Restricted cash................................................... (1,647,855) (2,546,083)
Repossessed assets................................................ (374,215) (161,071)
Retained interest................................................. (7,122,887) --
Other assets...................................................... (2,493,115) (1,666,112)
Servicing liability............................................... 3,773,121 --
Accounts payable - dealers........................................ 1,533,388 609,781
Other accounts payable and accrued expenses....................... (610,933) 1,013,052
Other liabilities................................................. 679,850 (268,734)
------------ ------------
Total adjustments............................................... (2,296,514) (2,936,888)
------------ ------------
Net cash provided by (used in) operating activities............. 190,368 (1,124,967)
Cash flows from investing activities:
Automobile installment contracts purchased.......................... (66,828,837) (62,251,117)
Proceeds from sale of automobile installment contracts.............. 73,541,280 31,665,399
Principal collections on automobile installment contracts........... 20,056,590 15,378,188
Capital expenditures................................................ (404,433) (300,177)
------------ ------------
Net cash provided by (used in) investing activities............. 26,364,600 (15,507,707)
Cash flows from financing activities:
Borrowings under senior debt........................................ 69,709,000 47,335,000
Payments on senior debt............................................. (86,211,000) (76,155,000)
Proceeds from issuance of securitized notes......................... -- 45,087,652
Payments on securitized notes....................................... (8,951,447) --
Proceeds from issuance of common stock.............................. 179,822 110,883
------------ ------------
Net cash provided by (used in) financing activities............. (25,273,625) 16,378,535
------------ ------------
INCREASE (DECREASE) IN CASH..................................... 1,281,343 (254,139)
Cash at beginning of period........................................... 1,323,149 1,703,320
------------ ------------
Cash at end of period................................................. $ 2,604,492 $ 1,449,181
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.......................................................... $ 4,437,451 $ 2,846,679
Income taxes...................................................... 1,723,000 1,287,000
Supplemental shedule of non-cash financing activities:
Gain on sale of automobile installment contracts.................... $ 4,985,000 $ 524,343
The accompanying notes are an integral part of these statements.
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FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
First Enterprise Financial Group, Inc., which operates through a
wholly-owned subsidiary, First Enterprise Acceptance Company, including its
wholly-owned special purpose subsidiaries, First Enterprise Securitization
Corp. and First Enterprise Securitization Co. II, (collectively, the
"Company"), is a specialty finance company engaged primarily in purchasing and
servicing installment sales contracts originated by automobile dealers for
financing the sale of used automobiles, vans and light trucks.
The unaudited interim consolidated financial statements of the Company,
in the opinion of management, reflect all necessary adjustments, consisting
only of normal recurring adjustments, for a fair presentation of results as of
the dates and for the interim periods covered by the financial statements. The
results for the interim periods are not necessarily indicative of the results
of operations to be expected for the entire year.
The unaudited interim consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and
reporting practices. Certain information in footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission; however the Company
believes the disclosures are adequate to make the information not misleading.
The unaudited interim consolidated financial statements contained herein should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's 1996 Annual Report.
IMPACT OF NEW ACCOUNTING STANDARDS
Effective January 1, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
As a result, for the securitization transactions completed on March 7, 1997 and
June 11, 1997, which met the specific criteria of SFAS No. 125, the Company
treated the securitizations as sales and has removed the securitized finance
receivables and related liabilities from its balance sheet and recognized the
applicable retained interest asset, servicing liability, and gain on the sale
of the finance receivables.
The Financial Accounting Standards Board, ("FASB"), has issued SFAS No.
128, "Earnings Per Share," which is effective for financial statements issued
after December 15, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully dilutive earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of this
new standard is not expected to have a material impact on the disclosure of
earnings per share in the financial statements.
NET INCOME PER SHARE
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. There will be no effect on the
Company's recognition or measurement of income or operations, but will require
changes in the disclosure and reporting of the change in equity during a period
from nonowner sources, such as unrealized gains (losses) on investment
securities. Adoption of SFAS No. 130 is required for the fiscal year beginning
January 1, 1998.
Net income per share amounts for 1997 are calculated based on net
income divided by the weighted average number of shares of common stock
outstanding during the period after consideration of the dilutive effect of
common stock equivalents. Pro forma net income per share for 1996 periods
reflect the issuance of the Company's common stock in it's Initial Public
Offering and are calculated based on pro forma net income divided by the pro
forma weighted average shares outstanding after consideration of the dilutive
effect of common stock equivalents.
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FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - FINANCE RECEIVABLES
Finance receivables are summarized as follows:
JUNE 30, DECEMBER 31,
1997 1996
-------------- ---------------
Contractual payments due............................................ $ 109,007,796 $ 160,224,969
Unearned finance charges............................................ (23,356,008) (41,673,797)
------------- --------------
Net principal balance............................................... 85,561,788 118,551,172
Unearned insurance commission....................................... 52,496 (13,364)
------------- --------------
Automobile finance receivables...................................... 85,704,284 118,537,808
Allowance for credit losses......................................... (8,705,292) (11,349,783)
------------- --------------
Finance Receivables, net............................................ $ 76,998,992 $ 107,188,025
============= ==============
Automobile finance receivables are accounted for on a discount basis
and generally have terms of 24 to 42 months, with a maximum term 54 months.
A summary of the activity in allowance for credit losses is as follows
for six months ended June 30, 1997 and 1996:
JUNE 30, JUNE 30,
1997 1996
------------ ------------
Balance at beginning of year.............................................. $11,349,783 $ 5,010,919
Additions from new business............................................... 6,956,755 6,329,755
Related to finance receivables sold or securitized........................ (7,844,279) (2,946,826)
Finance receivables charged off, net of recoveries....................... (5,176,967) (2,518,894)
Provision for credit losses............................................... 3,420,000 625,000
----------- -----------
Balance at end of period.................................................. $ 8,705,292 $ 6,499,954
=========== ===========
FINANCE RECEIVABLE SALE TRANSACTIONS
The Company utilized Asset Purchase Agreements and Servicing Agreements
to sell automobile finance receivables totaling $74.8 million between 1993 and
1996. All sales under these agreements have been without recourse to the
Company and have been accounted for as sales of receivables. Under the terms
of the agreements, the Company retains rights for the sold receivables and
receives a contractual annualized servicing fee equal to 3% of the net
outstanding receivables from the purchaser. The outstanding balance of all
receivables sold under these agreements and serviced by the Company totaled
$19,771,344 and $30,918,651 at June 30, 1997, and December 31, 1996,
respectively. The Company is eligible to receive additional bonus servicing
fees under these agreements based upon portfolio performance. The bonus
servicing fees represent the difference between the yield received by the
Company and the sum of the Company's 3% contractual servicing fee, the yield
retained by the purchaser and the addition or reduction necessary to maintain
the purchaser's reserve at the required level.
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FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - FINANCE RECEIVABLES - CONTINUED
Gains of $524,000 were recorded on sales of $35.2 million of finance
receivables for the six months ended June 30, 1996. The gains were determined
by the difference between the sales proceeds and the cost of the finance
receivables and adjusted for the present value of the difference between the
estimated future servicing revenues (net of a fixed rate to the purchaser) and
normal servicing costs ("excess servicing rights"). The excess servicing
rights have been capitalized and are being amortized over the expected
repayment life of the sold finance receivables. The unamortized balance of
excess servicing rights at June 30, 1997 was $212,735.
NOTE C - SENIOR DEBT
Senior debt consists of the following at:
JUNE 30, DECEMBER 31,
1997 1996
----------- -------------
Senior Debt:
$75,000,000, senior secured Credit Facility, due June 1, 1998,
with interest at the reference rate as defined in the agreement,
plus .25%, which was 8.75% at June 30,1997, and included
a placement option of 250 basis points over the LIBOR rate................ $44,651,000 $61,153,000
=========== ===========
Borrowings under the Credit Facility are collateralized by all finance
receivables not subject to the securitized pool and certain other assets. The
agreement requires the maintenance of certain financial covenants which
include, among others, ratio of debt to net worth and ratio of reserves to the
finance receivable portfolio. The Company was in compliance with all financial
covenants at June 30, 1997.
NOTE D - SECURITIZATION OF FINANCE RECEIVABLE ACTIVITIES
The Company has entered into a securitization facility with a placement
agent for the issuance of up to $200 million of securitized notes through
wholly-owned subsidiaries.
On June 18, 1996, the Company completed a $45.1 million debt
financing consisting of 6.84% fixed rate automobile securitized notes. The
notes were issued by First Enterprise Securitization Corporation, a
wholly-owned special purpose subsidiary of First Enterprise Financial Group,
Inc., and had an outstanding balance of $27,781,540 at June 30, 1997. The
proceeds received by the Company were used to repay indebtedness under the
Credit Facility. Principal and interest on the notes are payable monthly from
collections and recoveries on the pool of finance receivables. Financial
Security Assurance Inc. ("FSA") issued a financial guaranty insurance policy
for the benefit of the noteholders.
On March 7, 1997, the Company completed the sale of finance receivables
to First Enterprise Securitization Co. II, a wholly-owned special purpose
subsidiary of First Enterprise Financial Group, Inc., and the issuance of $44.1
million of 6.45% fixed rate notes. The proceeds received by the Company were
used to repay indebtedness under the Credit Facility. Principal and interest
on the notes are payable monthly from collections and recoveries on the pool of
finance receivables. FSA issued a financial guarantee insurance policy for the
benefit of the noteholders. The transaction was accounted for as a sale in
accordance with the criteria of SFAS No. 125
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FIRST ENTERPRISE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - SECURITIZATION OF FINANCE RECEIVABLE ACTIVITIES - CONTINUED
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." Accordingly, the Company has removed the securitized finance
receivables sold in March 1997, and related liabilities from its balance sheet
and recognized the applicable retained asset and servicing liability. The
Company recognized a gain on the sale of the finance receivables in the amount
of $3,025,000, which was determined through computing the present value of the
expected future net cash flows of the securitized assets.
On June 11, 1997, the Company completed the sale of finance receivables
to First Enterprise Securitization Co. II, a wholly-owned special purpose
subsidiary of First Enterprise Financial Group, Inc., and the issuance of $32.3
million of 6.62% fixed rate notes. The proceeds received by the Company were
used to repay indebtedness under the Credit Facility. Principal and interest
on the notes are payable monthly from collections and recoveries on the pool of
finance receivables. FSA issued a financial guarantee insurance policy for the
benefit of the noteholders. The transaction was accounted for as a sale in
accordance with the criteria of SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." Accordingly,
the Company has removed the securitized finance receivables sold in June 1997
and related liabilities from its balance sheet and recognized the applicable
retained asset and servicing liability. The Company recognized a gain on the
sale of the finance receivables in the amount of $1,960,000, which was
determined through computing the present value of the expected future net cash
flows of the securitized assets.
For the above securitization transactions, the Company is required to
establish and maintain cash reserve and collection accounts with a trustee with
respect to the securitized pool of finance receivables ("restricted cash").
The amounts set aside would be used to supplement certain shortfalls in
payments, if any, to investors. These balances are subject to an increase up
to a maximum amount as specified in the securitization indentures and are
invested in certain instruments as permitted by the trust agreement. To the
extent balances on deposit exceed specified levels, distributions are made to
the Company and, at the termination of the transaction, any remaining amounts
on deposit are distributed to the Company. The indentures require the Company
to maintain specified delinquency and credit loss ratios. The Company was in
compliance with these covenants at June 30, 1997.
NOTE E - STOCK OPTION PLANS
The following table summarized the Company's stock option plans for the
six months ended June 30, 1997.
OPTION PRICE
SHARES PER SHARE
------ --------------
Option outstanding at December 31, 1996..................... 487,950 $1.13 - $7.00
Option changes
Granted..................................................... 6,000 6.13
Exercised.............. .................................... (158,519) 1.13 - 1.36
---------
Options outstanding at June 30, 1997........................ 335,431 $1.13 - $7.00
=========
The Company continues to apply the provisions of Accounting Principles
Board Option No. 25, "Accounting for Stock Issued to Employees", in the
computation of employee compensation expense. The Company has provided pro
forma net income and income per share disclosures in its annual audited
financial statements contained in its 1996 Annual Report as if the fair value
based accounting method in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," had been used to account for
stock-based employee compensation expense.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the financial
condition of the Company at June 30, 1997 as compared with December 31, 1996
and the results of operations for the six months ended June 30, 1997 and 1996.
The financial information provided below has been rounded in order to simplify
its presentation. The ratios and percentages provided below are calculated
using the detailed financial information contained in the unaudited interim
consolidated financial statements, the notes thereto and the financial data
elsewhere in this report.
RECENT DEVELOPMENTS
On June 11, 1997, the Company completed the sale of finance receivables
to First Enterprise Securitization Co. II, a wholly-owned special purpose
subsidiary of First Enterprise Financial Group, Inc. and the issuance of $32.3
million of 6.62% fixed rate notes. The proceeds received by the Company were
used to repay indebtedness under the Credit Facility. Principal and interest
on the notes are payable monthly from collections and recoveries on the pool of
finance receivables. FSA issued a financial guarantee insurance policy for the
benefit of the noteholders. The transaction was accounted for as a sale in
accordance with the criteria of SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." Accordingly,
the Company has removed such securitized finance receivables and related
liabilities from its balance sheet and recognized the applicable retained
interest asset and servicing liability. The Company recorded a gain on the
sale of finance receivables in the amount of $1,960,000, which was determined
through computing the present value of the expected future net cash flows of
the securitized assets.
GENERAL
The Company is a specialty finance company engaged primarily in
purchasing and servicing installment contracts originated by dealers in the
sale of automobiles. The Company derives most of its revenue from (i) finance
charges earned on the installment contracts, (ii) the recognition of gains
resulting from the sale of installment contracts, (iii) contractual servicing
fees and bonus servicing fees resulting from the sales of certain receivables
and (iv) fees and commissions derived from the sale of ancillary products. The
following table summarizes the Company's sources of revenues,
SIX MONTHS
ENDED JUNE 30,
1997 1996
---- ----
Finance charges from installment contracts.......................... 53.1% 57.5%
Gain on sale of installment contracts............................... 24.8 4.3
Servicing income.................................................... 12.0 21.1
Other fees and commissions.......................................... 10.1 17.1
----- -----
Total............................................................... 100.0% 100.0%
===== =====
Installment contracts are purchased from dealers at a discount from the
principal amount financed by consumers which is non-refundable to dealers
("non-refundable contract acquisition discount"). The amount of the
non-refundable contract acquisition discount is negotiated between the dealers
and the branch managers based on several factors, including the
creditworthiness of the consumers, the value and condition of the automobiles
and the relationship between the amount to be financed and the automobile's
value. Installment contracts purchased during the six months ended June 30,
1997 and 1996 had a weighted average discount of approximately 11.0% and 10.8%,
respectively. Installment contracts purchased during the three months ended
June 30, 1997 and 1996 were 11.3% and 10.8%, respectively. The portfolio of
owned and sold installment contracts is grouped into pools on a chronological
basis (quarterly beginning in 1995) for purposes of evaluating the
non-refundable contract acquisition discounts. The non-refundable contract
acquisition discount represents both a credit allowance and a yield
enhancement, with the portion necessary to absorb credit losses allocated to
the allowance for credit losses. The remaining portion of the non-refundable
contract acquisition discount, if any, is allocated to the unamortized
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contract acquisition discount and is accreted into finance charge income over
the estimated life of the installment contracts using the
sum-of-the-months'-digits method which approximates the interest method. Since
August 1995, all of the Company's non-refundable contract acquisition discount
has been allocated to the allowance for credit losses. See "---Credit Loss
Experience."
The Company records an installment contract on its books as the total
of contractually scheduled payments under such contract, reduced by: (i)
unearned finance charges, which are recognized as income using the interest
method; (ii) unearned insurance commissions, which are recognized as income
over the average terms of the related policies using the
sum-of-the-months'-digits method; (iii) the unamortized contract acquisition
discount, which represents the portion of the non-refundable contract
acquisition discount not allocated to the allowance for credit losses and (iv)
that portion of the contract acquisition discount allocated to the allowance
for credit losses. If an installment contract becomes 90 or more days
contractually delinquent and no full contractual payment is received in the
month the account reaches such delinquency status, the accrual of income is
suspended until one or more full contractual monthly payments are received.
Late charges, deferment fees and extensions fees are recognized as income when
collected.
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RESULTS OF OPERATIONS:
The following table sets forth certain financial data relating to the Company.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
PORTFOLIO DATA:
Total Portfolio (1)............................... $179,962 $118,715 $179,962 $118,715
Average Total Portfolio (1)....................... 173,225 110,902 166,721 100,068
Average Owned Portfolio (2)....................... 100,214 64,924 110,328 61,124
Average indebtedness (3).......................... 84,404 57,901 91,372 53,889
Number of installment contracts purchased......... 3,873 3,934 7,940 8,324
Installment contracts purchased................... $ 31,330 $ 29,818 $ 66,829 $ 62,251
OPERATING DATA:
Total Portfolio yield (4)......................... 19.84% 23.51% 20.33% 23.52%
Owned Portfolio yield (5)......................... 18.90% 23.29% 19.48% 23.08%
Cost of borrowed funds (3)........................ 8.48% 10.65% 8.40% 10.78%
Net interest spread .............................. 10.42% 12.64% 11.09% 12.30%
Net interest margin (6)........................... 11.69% 13.80% 12.53% 13.57%
Allowance for credit losses as a
percentage of Owned Portfolio................... 10.16% 8.61% 10.16% 8.61%
Net charge-offs in the Owned Portfolio as a
percentage of average Owned Portfolio........... 12.50% 8.46% 9.46% 8.24%
Net charge-offs in the Total Portfolio as a
percentage of average Total Portfolio........... 9.96% 6.41% 9.15% 6.73%
Operating expenses as a percentage of
average Total Portfolio......................... 10.23% 11.46% 10.65% 12.28%
Number of branch offices.......................... 41 29 41 29
Number of dealers................................. 1,664 1,025 1,664 1,025
(1) The Total Portfolio represents the principal amount of contracts owned
and/or serviced by the Company. Averages were computed using the beginning
and ending balances for each month during the periods presented.
(2) The Owned Portfolio represents the principal amount of contracts owned by
the Company. Averages were computed using the beginning and ending
balances for each month during the periods presented.
(3) Average indebtedness represents the average dollar balance of borrowings
outstanding under the Credit Facility, subordinated notes and notes payable
- securitized pool throughout the period presented. Cost of borrowed funds
represents interest expense as a percentage of average indebtedness.
Averages were computed using the daily outstanding balances.
(4) Represents automobile finance charge income from the Total Portfolio as a
percentage of the average Total Portfolio.
(5) Represents automobile finance charge income as a percentage of the average
Owned Portfolio.
(6) Represents net interest income as a percentage of the average Owned
Portfolio.
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SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net Interest Income
Finance charges and interest increased $3.7 million, or 51.9%, from
$7.0 million for the six months ended June 30, 1996 to $10.7 million for the
six months ended June 30, 1997. The growth in finance charges and interest
resulted from an increase in the Owned Portfolio due to an increase in the
number of installment contracts purchased. Installment contracts purchased
increased $4.6 million, or 7.4%, from $62.2 million for the six months ended
June 30, 1996 to $66.8 million for the six months ended June 30, 1997. The
average Owned Portfolio increased $49.2 million, or 80.5%, from $61.1 million
for the six months ended June 30, 1996, to $110.3 million for the six months
ended June 30, 1997. The Company expanded from 29 branch offices at June 30,
1996 to 41 branch offices at June 30, 1997, including the opening of six branch
offices during the six months ended June 30, 1997.
The average Owned Portfolio yield decreased from 23.1% for the six
months ended June 30, 1996 to 19.5% for the six months ended June 30, 1997, and
from 23.3% for the three months ended June 30, 1996, to 18.9% for the three
months ended June 30, 1997. The decrease is attributable to the following
factors (i) the increase in forced placed collateral protection insurance
("CPI"), for which the Company does not charge interest, as a percentage of the
Owned Portfolio for the six months ended June 30, 1997 as compared to the six
months ended June 30, 1996, (ii) a decrease in the weighted average contract
rate of installment contracts purchased during the three and six months ended
June 30, 1997 as compared to the three and six months ended June 30, 1996,
resulting from increased penetration in states which have laws which limit the
maximum amount of finance charges, fees, and premiums and other charges that
can be charged, and (iii) and increase in the level of accounts 90 or more days
past due, resulting in the suspension of interest accruals.
Interest expense increased $914,000, or 31.6%, from $2.9 million for
the six months ended June 30, 1996 to $3.8 million for the six months ended
June 30, 1997. The increase in interest expense resulted from an increase in
borrowings under the Credit Facility and the securitization of installment
contracts in June 1996, March 1997 and June 1997. Average indebtedness
increased $37.5 million, or 69.6% , from $53.9 million for the six months ended
June 30, 1996 to $91.4 million for the six months ended June 30, 1997. The
average cost of borrowed funds decreased from 10.8% for the six months ended
June 30, 1996 to 8.4% for the six months ended June 30, 1997. The decrease in
average cost of borrowed funds was due to the following factors (i) the
extinguishment of subordinated debt bearing interest at a weighted average rate
of 13.3% in July 1996 from the proceeds of the Initial Public Offering, (ii) a
reduction of the interest rate on the Credit Facility from an average of 9.9%
for the six months ended June 30, 1996 to 8.5% for the six months ended June
30, 1997, and (iii) the securitization in June 1996, March 1997 and June 1997,
of installment contracts as a fixed rate debt transaction bearing interest at
rates of 6.8%, 6.5%, and 6.6%, respectively, the proceeds of which were used to
pay down borrowings under the Credit Facility. In addition to the weighted
average interest rates on the subordinated debt, the Company amortized both the
fees associated with the debt and the discount related to the detachable
warrants attached to the debt. Further, in addition to the stated rates of
6.8% , 6.5% and 6.6% on the fixed rate securitized notes, the Company is
amortizing fees associated with the securitization, which collectively totaled
approximately $2.1 million at June 30, 1997.
Net interest income increased $2.7 million, or 66.2%, from $4.1 million
for the six months ended June 30, 1996 to $6.8 million for the six months ended
June 30, 1997. The net interest margin on the Owned Portfolio decreased from
13.6% for the six months ended June 30, 1996 to 12.5% for the six months ended
June 30, 1997, and from 13.8% for the three months ended June 30, 1997 to 11.7%
for the three months ended June 30, 1997, due to the reduction in Owned
Portfolio yield, offset by the lower average cost of borrowed funds, as
discussed above.
Provision for Credit Losses
For the six months ended June 30, 1997, the Company made a provision for
credit losses of $3.4 million as compared to a provision for credit losses of
$625,000 for the six months ended June 30, 1996. The provision for credit
losses contributed to maintaining the allowance for credit losses as a
percentage of the Owned Portfolio at 10.2% as of June 30, 1997 as compared to
8.6% as of June 30, 1996. See "Credit Loss Experience."
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Other Income
Other income increased $4.2 million, or 81.9%, from $5.2 million for
the six months ended June 30, 1996 to $9.4 million for the six months ended
June 30, 1997. The increase in other income was primarily due to the increase
in gains recognized from the sales of installments contracts, offset by
decreases in servicing income derived from installment contracts sold and
commissions recognized from the sale of ancillary products.
For the six months ended June 30, 1997, the Company recognized $5.0
million in gains on the securitization of $82.5 million of installment
contracts, including a $2.0 million gain on the securitization of $35.1 million
of installment contracts for the three months ended June 30, 1997. The gains
were determined through computing the net present value of the expected future
cash flows of the securitizations, and the recognition of applicable retained
interests in the securitized installment contracts and servicing liabilities.
The securitization transactions are deemed to have met the criteria of
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities."
Accordingly, the Company has removed the securitized installment contracts and
related liabilities from its balance sheet. The retained interest in the
securitized installment contracts has been classified as "available for sale"
and accordingly has been marked to its estimated fair market value, with a
corresponding unrealized gain, net of taxes, recorded in stockholders' equity.
For the six months ended June 30, 1996, the Company recognized gains of
$524,000 on the sale of $35.2 million of installment contracts. The gains on
the sale of installment contracts were determined by the difference between
sales proceeds and the cost of the installment contracts adjusted for the
present value of the excess servicing rights. The excess servicing rights were
capitalized and are being amortized over the expected life of the installment
contracts in direct proportion to the reduction in the related pool of
installment contracts sold.
Servicing income decreased $161,000, or 6.32%, from $2.6 million for
the six months ended June 30, 1996 to $2.4 for the six months ended June 30,
1997. The decrease in servicing income was due primarily to the recognition of
gains on the securitization of installment contracts for the six months ended
June 30, 1997, which reduce the amount of excess servicing fees to be
recognized on the securitized contracts. The average balance of sold
contracts increased $17.5 million from $38.9 million for the six months ended
June 30, 1996 to $56.4 million for the six months ended June 30, 1997.
Income from insurance commissions decreased $379,000 from $1.4 million
for the six months ended June 30, 1996, to $1.1 million for the six months
ended June 30, 1997. The decrease was attributable to continued increased
penetration of an insurance product offered to customers in which the term of
the insurance product is longer in duration than products previously offered.
Commissions received on this product are deferred and recorded as commission
income over the term of the product. The Company continues to experience
increased sales of insurance products in connection with the increase in the
volume of installment contracts purchased.
Fee and other income increased $320,000 from $676,000 for the six
months ended June 30, 1996, to $996,000 for the six months ended June 30, 1997.
The increase was attributable to increased fees collected in connection with
the growth of the Total Portfolio due to an increase in the number of
installment contracts purchased.
Operating Expenses
Operating expenses increased $2.7 million, or 44.1%, from $6.1 million
for the six months ended June 30, 1996, to $8.8 million for the six months
ended June 30, 1997. The increase in operating expenses was due to increases
in salaries and employee benefits, rent and other expenses relating to the
opening of new branch offices as well as the addition of administrative
personnel at the Evanston, Illinois and Enterprise, Alabama offices. Salaries
and employee benefits increased $1.6 million, or 38.5%, from $3.9 million for
the six months ended June 30, 1996 to $5.5 million for the six months ended
June 30, 1997. Although operating expenses increased for the six months ended
June 30, 1997, compared to the six months ended June 30, 1996, the Total
Portfolio grew at a faster rate than
14
15
the increases in operating expenses. As a result, operating expenses as a
percentage of the average Total Portfolio decreased from 12.3% for the six
months ended June 30, 1996 to 10.2% for the six months ended June 30, 1997.
Income Taxes
Income taxes increased $540,000 from $1.1 million for the six months
ended June 30, 1996 to $1.6 million for the six months ended June 30, 1997.
The increase is due to increased net income attributable to the growth in the
total portfolio and related factors discussed above.
Upon termination of the Company's S Corporation status on January 1,
1996, and in compliance with SFAS No. 109, the Company recognized a deferred
tax benefit of $267,000 for the six months ended June 30, 1996 representing the
cumulative temporary differences between the financial reporting and tax basis
in its assets and liabilities.
Net Income
Net income increased $674,000, or 37.3%, from $1.8 million for the six
months ended June 30, 1996 to $2.5 million for the six months ended June 30,
1997. Net income increased $16,000 from $883,000 for the three months ended
June 30, 1996, to $899,000 for the three months ended June 30, 1997. The
increases in net income were primarily attributable to the growth in the Total
Portfolio and related factors as discussed above.
CREDIT LOSS EXPERIENCE
The Company maintains an allowance for credit losses at a level
management believes adequate to absorb potential losses in the Owned Portfolio.
The adequacy of the allowance for credit losses is evaluated by management on
an ongoing basis through static pool analysis of credit losses, delinquencies,
the value of the underlying collateral, the level of the finance contract
portfolio and general economic conditions and trends. An account is charged
off against the allowance for credit losses at the earliest of the time the
account's collateral is repossessed, the account is 150 days or more past due
or the account is otherwise deemed to be uncollectible.
The Total Portfolio is grouped into pools on a chronological basis
(quarterly beginning in 1995) for purposes of evaluating trends and loss
experience on a more detailed basis. If management determines that the
allowance for credit losses is not adequate to provide for potential losses of
an individual pool, amounts will be transferred, to the extent available, from
the unamortized contract acquisition discounts for that pool to the allowance
for credit losses. Any remaining shortfall in the allowance for credit losses
would be provided through a charge against income. If management determines
that the allowance for credit losses is in excess of amounts required to
provide for losses of an individual pool, the allowance for credit losses
charge to income, if any, will be reduced or the contract acquisition discounts
will be amortized into income over the remaining life of the contracts in the
pool. For the six months ended June 30, 1997, the Company increased its
allowance for credit losses by $3.4 million through charges against income
based upon continued historical analysis, particularly evaluation of the
earliest pools.
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The following table sets forth the cumulative net charge offs as a
percentage of the original pool balance based on the quarter of origination and
segmented by the number of months elapsing since origination.
POOL'S CUMULATIVE NET LOSSES AS A PERCENTAGE OF ORIGINAL POOL BALANCE
% of
Original
Principal
Number of Months Since Origination Balance
Pool 3 6 9 12 15 18 21 24 27 30 Remaining
- ---- ----- ----- ------ ------ ----- ------ ----- ------ ----- ------ --------
1995:
1st Qtr 0.10% 0.67% 2.06% 3.55% 5.79% 6.96% 7.68% 8.38% 9.67% 10.30% 19.7%
2nd Qtr 0.01% 0.63% 1.81% 3.39% 4.71% 5.69% 6.67% 7.85% 8.97% 25.0%
3rd Qtr 0.06% 0.57% 2.26% 4.17% 5.92% 7.13% 8.51% 9.70% 31.3%
4th Qtr 0.01% 0.41% 2.07% 3.73% 5.39% 7.66% 9.31% 42.6%
1996:
1st Qtr 0.01% 0.25% 1.53% 3.30% 6.16% 8.42% 57.8%
2nd Qtr 0.00% 0.32% 1.07% 3.12% 5.05% 61.0%
3rd Qtr 0.00% 0.10% 1.24% 2.84% 73.9%
4th Qtr 0.00% 0.13% 0.69% 83.2%
1997:
1st Qtr 0.00% 0.08% 89.7%
2nd Qtr 0.00% 96.6%
DELINQUENCY EXPERIENCE
A payment is considered past due if the customer fails to make any full
payment on or before the due date as specified by the terms of the installment
contract. The Company typically contacts delinquent customers within one to
two days after the due date.
The following table summarizes the Company's delinquency experience for
accounts with payments 60 days or more past due on a dollar basis for the Total
Portfolio and Owned Portfolio. The delinquency experience data excludes
automobiles which have been repossessed.
AS OF JUNE 30,
1997 1996
--------- --------
TOTAL PORTFOLIO:
Installment contracts, gross $235,828 $ 159,207
Past due accounts, gross:
60 to 89 days 3,761 993
90 days or more 2,843 891
-------- ---------
Total 60 days or more $ 6,604 $ 1,884
======== =========
Contracts with payments 60 days or more past due as a
percentage of total installment contracts, gross 2.80% 1.18%
======== =========
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AS OF JUNE 30,
1997 1996
------- -------
OWNED PORTFOLIO:
Installment contracts, gross $109,689 $103,216
Past due accounts, gross:
60 to 89 days 2,208 489
90 days or more 1,810 470
-------- --------
Total 60 days or more $ 4,019 $ 959
======== ========
Contracts with payments 60 days or more past due as a
percentage of owned installment contracts, gross 3.66% 0.93%
======== ========
Liquidity and Capital Resources
The Company has funded its operations, branch office openings and the
growth of the Total Portfolio through six principal sources of funds: (i)
payments received under installment contracts, (ii) borrowings under the Credit
Facility, (iii) proceeds from the issuance of subordinated notes, (iv) proceeds
from the sale of installment contracts and (v) proceeds from asset
securitization transactions.
Net cash flows provided by operating activities were $190,000 for the
six months ended June 30, 1997, and net cash flows used in operating activities
were $1.1 million for the six months ended June 30, 1996.
The Company's cash flows used in investing activities since inception
have been used primarily for the purchase of installment contracts. Cash used
for the purchase of installment contracts was $66.8 million and $62.3 million
for the six months ended June 30, 1997, and 1996, respectively. Capital
expenditures were $404,000, and $300,000 for the six months ended June 30, 1997
and 1996, respectively. Cash used in investing activities was offset by (i) the
collection of principal on installment contracts of $20.1 million and $15.4
million for the six months ended June 30, 1997 and 1996, respectively and (ii)
net proceeds of $73.5 million and $31.7 million from the sales of installment
contracts for the six months ended June 30, 1997, and 1996, respectively.
Cash was used in financing activities, primarily through payments on
the Credit Facility, and payments on the securitized notes. Net reductions
under the Credit Facility were $16.5 million and $28.8 million for the six
months ended June 30, 1997, and 1996, respectively. Payments on the
securitized notes were $9.0 million for the six months ended June 30, 1997, and
proceeds from the issuance of securitized notes were $45.1 million for the six
months ended June 30, 1996. Cash was provided by the issuance of common stock
in the amounts of $180,000 and $111,000 for the six months ended June 30, 1997,
and 1996, respectively.
As of the date hereof, the Company has a $75 million Credit Facility
with a group of six banks, for which LaSalle National Bank acts as agent, and
which expires June 1, 1998. The Company has received notice from one of the
Credit Facility banks that it will withdraw from the Credit Facility upon its
expiration. Management is currently engaged in negotiations to replace the
existing Credit Facility with a new and expanded facility. The Company has no
commitment for any such facility and there can be no assurance that any such
facility will be obtained. The Credit Facility is collateralized by a lien on
all the Company assets not subjected to the securitized pool. Interest is
payable at the agent bank's reference rate plus .25% (8.75% at June 30, 1997)
and the Company has a option of 2.50% over the LIBOR rate. The Credit
Facility requires the Company to maintain minimum capital funds (as defined) of
$11.5 million. The Credit Facility also requires that total loss reserves be
maintained at not less than 8% of net installment contracts receivable and no
more than 3% of net installment contracts receivable in the Total Portfolio may
be more than 60 days past due. The Credit Facility also requires that earnings
before interest and taxes to cash interest expense may not be less than
125% and the ratio of unsubordinated debt to tangible net worth plus
subordinated debt cannot exceed 5 to 1. At June 30, 1997, the Company was in
compliance with all of these covenants.
In order to meet its funding needs, the Company will require additional
financing to supplement its expected cash flows from operations, the
anticipated borrowings under its Credit Facility and proceeds from the
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issuance of securitized notes. To that end, the Company is seeking to augment
its capital base through the issuance of subordinated notes to one or more
financial institutions. The Company also has a securitization facility with a
placement agent for the issuance of up to $200 million of securitized notes
through one or more wholly-owned special purpose subsidiaries. Initially, on
June 18, 1996, First Enterprise Securitization Corporation sold approximately
$45.1 million of 6.84% fixed rate securitized notes in an asset securitization
transaction. The debt incurred in this securitization is reflected on the
balance sheet of the Company and did not result in a gain on sale. On March 7,
1997 and June 11, 1997, First Enterprise Securitization Co. II sold
approximately $44.1 million and $32.3 million of fixed rate securitized notes
bearing interest at 6.45% and 6.62%, respectively. These securitization
transactions met the criteria of SFAS No. 125, and accordingly, the Company
removed the securitized assets and related liabilities from its balance sheet
and recognized applicable retained interests in the securitized installment
contracts and servicing liabilities and recorded a gain on the sale.
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed above in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those factors as
discussed in the Company's 1996 Annual Report and herein.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders
Date of meeting - May 6, 1997
Type of meeting - Annual Meeting of Shareholders
1) Election of Directors
Votes Cast
---------- Votes
Name of Directors Voted For Against Withheld
---------------------- --- ------- --------
Michael P. Harrington 4,414,928 0 0
Louis J. Glunz, Ph.D. 4,412,128 0 2,800
M. William Isbell 4,412,298 0 2,000
Thomas G. Parker 4,350,380 0 64,548
Joseph H. Stegmayer 4,414,428 0 500
Paul A. Stinneford 4,414,628 0 300
Kenneth L. Stucky 4,350,380 0 64,548
There were no abstentions or broker non-votes in the
election of Directors.
Item 5. Other Information - Not Applicable
Item 6. (a) Exhibits
10.1 Sale and Servicing Agreement, by and between
First Enterprise Financial Group, Inc., First
Enterprise Acceptance Company, First Enterprise
Securitization Co. II and LaSalle National Bank
11 Statement Regarding Computation of Net
Income Per Share
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST ENTERPRISE FINANCIAL GROUP, INC.
August 13, 1997 /s/ Michael P. Harrington
Date: __________________________ ____________________________________
Michael P. Harrington
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive Officer)
August 13, 1997 /s/ Jan W. Erfert
Date: __________________________ ____________________________________
Jan W. Erfert
Vice President and Treasurer
(Principal Accounting and
Financial Officer)
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INDEX OF EXHIBITS
Exhibit No. Description
10.1 Sale and Servicing Agreement, by and between First
Enterprise Financial Group, Inc., First Enterprise
Acceptance Company, First Enterprise Securitization Co. II
and LaSalle National Bank
11 Statement Regarding Computation of Net Income Per Share
21